Thursday, June 30, 2011

US Treasury Debt Demand Weakens

This week saw several auctions of public debt issuance. The results are a possible signal that there is less demand for US debt than in the past. Here are results for the 2 year note, 5 year note and 7 year note. Highlights are written by Econoday.
On the 2 Year Note auction:
This week's run of coupon auctions is getting off to a slow start. Coverage of 3.08 for today's $35 billion 2-year auction is on the low side of trend and is well below May's 3.46. The stop-out rate of 0.395 percent is one basis point higher than the one o'clock bid. In another sign of weakness, dealers were awarded 65 percent of the auction which is the most in more than two years. Demand for Treasuries is easing following the results. Tomorrow the Treasury auctions $35 billion of 5-year notes.
On the 5 Year Note auction:
Buyer resistance may be appearing for Treasuries, judging by yesterday's soft 2-year note auction and today's even softer 5-year auction. Coverage is 2.59, the lowest of the last ten auctions, all $35 billion in size. In another sign of weakness, the high yield of 1.615 percent is more than two basis points above the one o'clock bid. Dealers ended up taking down 52 percent of the offering for the highest rate of the last four auctions in yet another sign that demand is soft. Demand for Treasuries is falling in reaction to the results which point to trouble for tomorrow's $29 billion 7-year auction.
On the 7 Year Note auction:
Treasury supply may finally be getting ahead of demand. That's a conclusion that can reasonably be drawn from this week's poorly received string of coupon auctions including today's $29 billion offering of 7-year notes. Coverage of 2.62 is light for this issue while the high yield of 2.43 percent is three basis points over expectations. In a sign of weak retail demand, dealers ended up taking down an outsized 56 percent share of the offering. Demand for Treasuries is sinking following today's results.

Here is a look at the IEI daily graph (iShares Barclays 3-7 Yr Treasury Bond index):